Blackstone Mortgage Trust Inc (BXMT) 2018 Q3 法說會逐字稿

Good day, and welcome, everyone, to the Blackstone Mortgage Trust Third Quarter 2018 Investor Call. My name is Dorina, and I'm your event manager. (Operator Instructions) I would like to advise all parties that this conference is being recorded. (Operator Instructions) And with that, I'd like to hand over to Weston Tucker, Head of Investor Relations. Please proceed.

Great. Thanks, Dorina. And good morning to everyone, and welcome to Blackstone Mortgage Trust's third quarter conference call. I'm joined today by Steve Plavin, President and CEO; Tony Marone, Chief Financial Officer; and Doug Armer, Head of Capital Markets.

Last night, we filed our 10-Q and issued a press release with a presentation of our results, which are available on our website and have been filed with the SEC.

I'd like to remind everyone that today's call may include forward-looking statements, which are uncertain and outside of the company's control. Actual results may differ materially. For a discussion of some of the risks that could affect results, please see the Risk Factors section of our most recent 10-K. We do not undertake any duty to update forward-looking statements. We will also refer to certain non-GAAP measures on the call, and for reconciliations, you should refer to the press release and our 10-Q.

This audiocast is copyrighted material of Blackstone Mortgage Trust and may not be duplicated without our consent.

So a quick recap of our results. We reported GAAP net income per share of $0.67 for the third quarter, while core earnings were $0.75 per share, up from the prior year comparable period. Last week, we paid a dividend of $0.62 with respect to the third quarter. And based on yesterday's closing price, the dividend reflects an attractive yield of 7.6%. If you have any questions following today's call, please let me know.

And with that, I'll now turn things over to Steve.

Thanks, Weston. Continuing the momentum from the first half, BXMT reported strong third quarter results with core earnings of $0.75 per share. Our originations team maintained its high productivity, closing $1.4 billion of loans in the quarter and continuing to build our pipeline. We now have another $2 billion of originations in the closing process or that have closed since quarter-end. We've grown our portfolio more than 20% year-to-date to $13.8 billion with the combination of new originations and fundings on existing loans, far exceeding repayments.

Our quarterly originations included office, multifamily and hotel loans in California, Hawaii and Australia. We also had our single best quarter of Walker & Dunlop origination since we've formed the JV with almost $200 million of closings, a nice addition to our productivity.

Prepayment penalties again boosted our baseline earnings this quarter, contributing to our outperformance. The largest contributions came from 2 construction loans that were repaid soon after building completion, one from the sale and another from the recapitalization of high-quality underlying real estate while call protection was still in effect. These prepayment penalties totaled $9.2 million. While prepayment fees tend to be unpredictable in timing and magnitude, over time, they have provided a consistent source of supplemental earnings.

BXMT continues to benefit from the power of the Blackstone global real estate franchise. BXMT originations ramped up this year in Spain, the U.K. and Australia, with the Blackstone equity businesses thriving with strong teams of investment and asset management professionals on the ground.

We also have loan originators in the BX offices in London and Sydney that have been able to export our low-cost debt capital to regions that have not seen the same magnitude of spread compressions in the U.S. The origination ROIs in these markets are higher.

Deal flow is still episodic outside the U.S., but our ability to source and lend internationally and take advantage of global market inefficiencies adds to the scale, dynamism and quality of BXMT overall.

In the U.S., our year-to-date originations were up 50% over the same period last year. Our real estate private equity fund sponsored clients have been active and the CRE equity fund universe still has more than $175 billion of dry powder, so we expect to see continued strong demand as that equity is invested in new acquisitions that will require financing. We are still seeing refinance opportunities as well.

The market remains competitive with spreads trending tighter. Fundamentals and demand generally are stable, especially in the major markets that we target.

We achieve our best economic results when we can leverage our scale and target and real estate expertise, especially on larger loans, special situations where speed and certainty matter most, construction loans and loans in markets outside North America.

The credit quality of our 113 loan, $13.8 billion portfolio remains high. The average LTV of Q2 direct originations was 59% and the overall origination LTV stands at 62%.

To help fund the growth in our portfolio, we issued $270 million of premium equity in the quarter, and year-to-date, we've also added $2.2 billion of efficiently priced senior secured credit capacity, with more in process.

We continue to expand our multicurrency capability to cover the origination potential outside the U.S. The scale and quality of our capital markets initiative matches our origination capability and it also benefits from our -- from the global Blackstone real estate platform and its great track record as a borrower and banking client.

We've built a market-leading, global senior mortgage lending business with a $13.8 billion portfolio, almost $4 billion of equity capital and a highly efficient match-funded liability structure. Our focus remains on dividend quality and stability and continuing to introduce investors to BXMT, and the opportunity to invest in this Blackstone sponsored company with its highly compelling 7.6% dividend yield.

And with that, I'll turn the call over to Tony.

Thank you, Steve, and good morning, everyone. This quarter, we again delivered compelling results with GAAP net income of $0.67 per share and core earnings of $0.75 per share.

For the second consecutive quarter, we recognized significant prepayment fees and fee acceleration income, a benefit of our loan structures which capture significant economics upon our early prepayment.

In 3Q, we recorded $0.10 per share of such prepayment-related income, while our 2Q results included $0.13, as compared to a range of $0.01 to $0.03 in a typical quarter.

Adjusting for these outsized income items as well as the GE reserve reversal we discussed in the second quarter, our run rate earnings remained stable at $0.65 per share for 3Q, up slightly from the comparable $0.64 in 2Q, notwithstanding the dilution from the incremental shares we issued during the quarter, which Steve mentioned earlier.

We are proud of the strong performance which demonstrates the consistent earnings generation of our business, with material upside potential to earnings and book value in periods with loan prepayments or other events.

At $0.65 and $0.64 in 3Q and 2Q, respectively, our $0.62 dividend is well covered, and we are able to retain the additional earnings generated from prepayment income as additional book value.

One further note on earnings before I move on. One of the larger prepayment fees we recognized this quarter relates to a loan we previously syndicated but still record gross on our balance sheet, with the whole loan included as an asset and the senior loan recorded as a participation sole liability. As a result of this gross accounting, we recorded additional interest income of $0.15 and interest expense of $0.08, for a net impact of $0.05 per share net of incentive fees. I highlight this to provide clarity, as this accounting makes our interest expense look higher than one would expect this quarter given our relatively low cost of capital, but it's really just a gross-up of the fees we earned on our net loan position.

Turning to book value. This quarter we issued 6.9 million shares of common stock through an underwritten offering in July as well as 1.3 million shares through our at-the-market program at an average price of 1.21x our 2Q book value. These accretive stock offerings raised $270 million of fresh capital for our growing business and contributed to a $0.45 increase in book value per share.

As Steve mentioned earlier, we closed $1.4 billion of new loans this quarter, bringing our total year-to-date originations to $7.2 billion, slightly more than double the same time last year.

This quarter includes our first 2 loans in Australia, increasing our loans outside of North America to 19% of our total portfolio and further diversifying our business and pipeline of future origination opportunities.

As with our existing foreign currency investments, we expect to address Australian currency exposure through a combination of Australian dollar financing, which provides a natural hedge by lending and borrowing in the same currency, and foreign currency forward contracts, which mitigate our remaining net exposure to the currency and effectively swap local currency index to USD LIBOR through the forward points embedded in the hedge contracts. These forward points are recorded in other comprehensive income for GAAP accounting and so are included as an additional component of core earnings.

We closed the quarter with a total loan portfolio of $12.7 billion, which is roughly in line with 2Q, however, excludes the CorePoint investment originated last quarter.

During the third quarter, we contributed our $518 million CorePoint loan to a single asset securitization alongside JPMorgan who owned the other 50% pari-passu participation in the loan.

We retained a $99 million subordinate risk-retention investment in the securitization, which generates an attractive L plus 10% return. We do not consolidate this securitization in our GAAP financial statements and instead only reflect the net $99 million investment as a component of other assets on our balance sheet.

Including the $1 billion loan that is underlying our net security position, our total investment portfolio grew to $13.8 billion as of 9/30, another record for our business.

The securitization transaction as well as the common stock we issued during the quarter drove our debt-to-equity ratio down to only 2.3x as of September 30 from 2.6x last quarter.

As always, we remain focused on the stability of our balance sheet and pursuing accretive capital sources to finance our low-leverage senior loan investments. We closed the quarter with available liquidity of $664 million, which we expect to deploy into the robust pipeline Steve mentioned earlier as we move into year-end.

Thank you for your support. And with that, I will ask the operator to open the call to questions.

(Operator Instructions) And the first question is from the line of Steve Delaney.

I noticed when we were reviewing the 10-Q, specifically your risk rating section, there was an increase in the number of 2-rated loans by about 7 and -- from 36 to 43. But it appears most of the new loans were 3-rated. So it appears there are some upgrades. Could you comment on that and confirm if that was the case?

Sure, Steve. Yes, I think those 7 loans that you know were upgrades from 3s to 2s as part of our process. Every quarter, we revisit every loan in the portfolio, in an in-depth portfolio review that includes an updated risk rating. And in this past quarter, we had 7 upgrades, no downgrades. The loans typically originated at a 3. And as they progress through the business plans, they're often upgraded to a 2. And typically, they're repaid at the 2 level. So it's -- you have to be careful in terms of looking at what that information means. But in this case -- and I mentioned it in my script that the credit quality of the portfolio is very strong. And the upgrade trend that we saw during the quarter is reflective of that.

So you would suggest, I think, Steve, that at least with that specific project, the fundamentals, the real estate fundamentals are better in terms of absorption or projected revenue and not just some sort of fair value mark on the asset. Am I hearing you right?

Well, I think what you're really seeing is that -- is progress along the business plans of the transitional assets that we finance. So we might finance a building that's 50% or 60% leased. And when it gets to 70% or 80% leased or 90% leased, then we review it again, then it gets -- its credit rating could be upgraded from 3 to 2. So it's really a -- our view of credit and credit quality in our portfolio. And a lot of times, it's the anticipated migration or improvement of assets as they progress along the business plans.

Right. And just a quick follow-up on the 2 new loans in Australia. They were about $300 million combined, I believe. In terms of property type, they were both indicated as other. Could you just provide some color on that?

Yes, sure. One -- I would just say in general, the loans we're making in Australia and everywhere in the world are similar in concept. I mean, we're -- they're moderate LTV transitional loans, better markets and better sponsors. The first 2 loans in Australia, one was a 68% LTV portfolio of office and hotel assets, 9.5 debt yield, strong performing and good local sponsor. The other was a construction loan. It's really the expansion of 2 existing facilities. It's a 100% preleased. It's a AAA credit, it's a hyper-scaled data center, equity sponsored by TPG and Goldman, and really an outstanding project and one that again the credit risk is completely mitigated by the preleasing.

The next question is from Stephen Laws.

Could you maybe talk -- you've done a good job about opportunistically raising capital and deploying that. Can you maybe talk about how you look at maturities from here against your pipeline as far as keeping capital deployed? Particularly, your investments are prepayment protected for a period of time. You do provide the extended maturity. But can you -- or maximum maturity. Can you talk to what you expect the pay-offs to be like kind of over the next 2 to 4 quarters?

Yes, Stephen, it's really tough to predict the prepayments in advance. We -- the borrowers are usually required to notice us 30 days out. A lot of the loans are outside of call protection. But we've had a lot of success in maintaining loans well beyond the call protection period through very active asset management, making sure that we're continuing to amend our loans as necessary to reflect improvements and performance of underlying real estate or changes in marketing conditions. And the prepayments this quarter were relatively light, certainly compared to our originations. Going forward, we do expect significant prepayments, but we have been able to originate in excess of those and grow our portfolio. So all these loans are going to repay, it's just a matter -- obviously, it's just a matter of when. And what doesn't get repaid now that we expect it will repay some time probably in '19. It's part of that process where we go and review credit quality, we do try and think about prepayment dates. But it's really just our estimation of when we think it might be in the sponsors' best interest to repay. But again, we don't get a lot of visibility on it until they're very close to actually committing to a sale or replacement loan.

The one thing I would add to that, Stephen, it's Doug, is that by comparison to 2015 and '16 when we took on a lot of very seasoned loans from GE, we've now built the balance sheet up beyond that level with -- by definition newly originated loans. And so we're, on average, a little bit earlier in the life cycle of a loan, which of course is a random walk, as Steve mentioned. But we're, on average, from a portfolio point of view, a little bit earlier in the life cycle of the loans than we were by comparison in 2016 with a larger balance sheet. So that growth in the balance sheet contributes to a sort of youth effect in the portfolio, which will make the weighted average life seem a little bit longer than it did certainly in the 2015, '16 period.

Great. I appreciate the color on that. And as you're building the pipeline of new investments, can you maybe talk a little bit about competition? What you're seeing from others out there? Are they competing on price? Is it less covenants? Less prepayment protection? Maybe what you're seeing in the industry as you continue to look for new investment opportunities?

Well, we continue to look for new investment opportunities. And obviously, in the markets that we like, we really have a much large -- a focus on the bigger deals that are less competitive because less lenders are able to do them unless they have very big vehicles. Some of the deals that we -- that I talked about that have -- that require certainty or speed or maybe in jurisdictions where not everybody is active, also help get us out of the competitive fray. On the more commodity deals, maybe a U.S. deal that -- $100 million or $150 million of loan size, there's more competition. We see it from banks, from the other mortgage REITs and from private debt funds. It depends upon the situation, the sponsors and who their relationships are with. We're generally able to compete favorably because given our sort of cost to capital and our history now with a lot of the borrowers in the U.S. especially the fund sponsors. But it is competitive, and we're seeing the impact of the competition primarily in rate. Most of these sponsors want to get their equity invested. So we haven't seen a meaningful leverage creep. And terms are -- on the margin are our bases of competition. But no irresponsible, I mean, nothing like what we saw in the 2006, 2007 time frame. So -- and some of the spread competition really just reflects the increase in base rates and the anticipated decreases in spreads as a result of absolute rates increasing with base rates. So it is overall competitive for us, but we're winning a fair amount and finding good opportunities to make accretive investments.

Great. And one last question, if I may. Can you talk maybe to property types that you find attractive or less attractive? Curious to get your higher level view on hotels here as well as maybe luxury condos in Manhattan seem to be a softening market. But maybe any asset types you like or don't like at this point in the cycle?

Well, we've avoided luxury condos. We don't have any in BXMT. We don't have any suburban regional malls. Our retail percentage is down to 2%. Again, sort of reflective of our general view that logistics and the Internet are the near term winners and physical real estate -- physical retail real estate is more challenged. We tend to avoid in general suburban assets, especially suburban full-service hotels and office buildings. We're much more constructive on multi-family in some of those markets. We like housing almost everywhere in the world. And we like the innovation cities, cities with dynamic demand that have -- typically have tech tenancies that have real growth in terms of tenant demand. And those tend to be the coastal gateway cities. And so that's where you see us most active is in these major cities and larger assets. We -- on hotels, where there's barriers to competition, we think that there is some good opportunities for hotel. The performance is generally improved with increased economic activity in a lot of markets. We're a huge owner of hotels worldwide. We have great insight into where we want to be and where we don't. So you've seen -- hotels are still a minority percentage of our portfolio compared to office, which continues to be the largest percentage, about 45% -- typically between 45% and 50% of what we're seeing and doing.

And the next question is coming from the line of Ben Zucker from BTIG.

I wanted to go back to the international landscape. I heard you that the loans you're making abroad are pretty much the same type of loan that you would make in the U.S. But can you talk about the market environment and underlying fundamentals and how they differ between markets like Australia, Europe and then comparing them to the United States?

Yes. The market dynamic -- the dynamics in the major markets are all generally favorable, are certainly the ones that we're interested in investing. Again, high-quality real estate, good solid underlying fundamentals and demand for real estate. The biggest difference is that the markets outside the U.S. are much more episodic. We just don't see the regular flow that we see in the U.S. There is less consistent demand. We do see across a very broad palette, opportunities that do meet our mandate. And from a quality standpoint, look, as good or better than what we're seeing in the U.S., certainly better from a spread standpoint and an ROI standpoint. I wish there was more of it. But the major international markets are generally pretty good. And Australia, specifically, the banks have gotten a little bit more conservative. So some of the deals that might have gone to the bank market are -- look, like they might be available to us now. These were our first 2 loans. But we have other loans that we're looking at in Australia. And the U.K., same thing. The banks are not as aggressive as they were in the last cycle. And so we're seeing more opportunity there. We tend to follow our clients. A lot of the private equity clients are more active in Australia now than they had been, same with Europe. It's a great client base for us to follow into these regions where we have people on the ground on real estate and get the full benefit of the Blackstone franchise like we do in the U.S.

That's very helpful. And obviously, there's a more unique capability of your broader platform's reach. Turning to the liability structure. I think I noticed that your 2013 notes are coming due in the beginning of December of this year, in just over a month. Would you be willing to speak to what your plans are for that? Do you think you're going to just redeem those? Or are you looking at doing a refinancing with those?

Ben, it's Doug. We will redeem those, and we've been clear that we'll be paying those off in cash, which is, I think, an important distinction for the market. We've done a good deal of convertible note issuance at the -- in the summer last year and at the beginning of this year. So in that sense, you can consider those notes already refinanced. But we've got great access to the capital markets, and we will continue to evaluate our options in terms of managing leverage on the balance sheet. So relatively small number given how our balance sheet has grown since 2013 when we issued those. So it's not a real needle mover in terms of our capital structure. It's the end of a 5-year road with those notes. They performed very well, and we were very happy with the transaction. We're happy with the product type in general and it's certainly one of the arrows in our quiver going forward.

And speaking about that while we're on the debt side. That risk retention security that you picked up, that's a nice yield in piece of paper. Can -- you -- I don't think that you can put bank debt on that, but you'd be able to use the convertible notes as like quasi-equity to help finance that and make it more accretive. Is that correct?

That's true, and you could say that about any of the investments that we make. The convertible notes lever our balance sheet as a corporate obligation, and that capital is fungible. So we invest that in all of our portfolio, which is levered separately at the asset level. But you can think of it as a sort of a pair trade relative to a specific investment on -- episodically. That's a perfectly good way to think about it. That securitization, by the way, while we're on the financing topic, although it's accounted for on a net basis, represents a very large and structurally sound financing of our investment in that loan. It's as you see in CMBS deal and so it's nonrecourse and nonmark-to-market and very efficiently priced, resulting in that attractive yield on our retained position.

Yes. And then just real lastly, it seems like your pipeline for 4Q is pretty healthy. And obviously, the fourth quarter is normally the most seasonally active. I'm curious though, because my understanding is it takes a little bit of time for the loan process to go through. Since the rates really started to move kind of at the end of 3Q in September, has there been -- do you think there's been or going to be any impact on the incremental borrower going forward through the remainder of fourth quarter? Or even out into first quarter? Maybe making next year a little soft to get started. Just what are you guys feeling and seeing on the street now that rates are a little bit higher than when we last spoke?

Ben, I think that we haven't seen that -- any impact from rates thus far. Again, most of our borrowers are just floating rates -- are floating-rate borrowers and aren't looking at fixed rates and what the impact of fixed rate cost to borrowing might be on their deal. I do think though that if rates continue to move then you will see some deals get retraded and maybe impact some deals that may be on the margin may not close that would have closed from an acquisition standpoint. So anytime there's a sharp movement in rates, you have -- certainly have the ability to have a little bit more deal fall out. Hopefully, we'll be the beneficiary of that and maybe we'll pick up some financing opportunities that might've gone fixed rate or that there'll be some more opportunistic things to finance if some contracts fall out of that. But I haven't -- we haven't seen it yet, but I wouldn't be surprised if we see a little bit of that going forward.

The next question is from Rick Shane from JPMorgan.

Ben really just asked my question. But to sort of follow up on the borrower behavior related to the movement in base rates. Obviously, this has an impact as well on your counterparty risk if rates continue to rise. Is there any protection that you get or require the borrowers to take in terms of swaps or any sort of protection in that way?

Yes. We typically require in almost all cases that our borrowers purchase interest rate caps. That's really an insurance policy on rates rising above a predetermined level, and those interest rate caps are provided by creditworthy banks and posted to us as additional collateral for the loans. And we have those in almost all instances. So it does provide us with a little bit of insurance in the event that LIBOR moves -- continues to move at a rapid pace potentially for us with those caps, which is typically somewhere in the 3s over LIBOR -- 3s of LIBOR, 3% LIBOR or higher.

Got it. Okay. And then just to continue that, you talked about the potential for some fallout in the fixed rate market and the opportunity there. Is the other implication that the duration on newer loans could extend not only will it impact originations, but it actually could delay refinancing from the transitions?

I think it's possible. Any sort of market volatility or market dislocation typically will result in some period of transaction parties going to the sidelines and deals being delayed or less likely to occur. And so yes, that could -- we could definitely benefit from getting a little bit more duration on our loans. We saw a little bit of that in the first quarter of 2016, where we saw a lot of CMBS deals repriced and a lot of borrowers walking away from those and some -- and a lot of sale transactions put on hold or canceled. We've moved forward with our funding commitments during that time and put on some great loans. So we do think that we benefit from these kinds of periods of volatility, and we'll see how it plays out.

The next question is coming from the line of Jade Rahmani from KW (sic) [KBW].

What drove the moderation in the quarter's loan repayment? It seems at odds with what the banks are seeing in terms of loan growth. Their portfolios are actually declining modestly.

It's really, again, difficult to explain, Jade, our repayments in any one quarter. I think over an extended period of time, you're going to see all of our loans repay. And it's nice to see that they're -- the average duration of those loans extend out a little bit longer than maybe what we had anticipated. It's definitely beneficial for us. And we're -- so I think we'll see the prepayments that maybe could have occurred in the second half of this year, maybe some of those will get pushed into 2019. But I don't see anything that is anything other than the adjustment of the timetable. There is no loans that we've seen that for some reason now are less likely to get repaid or aren't going to get repaid for anything other than strategic decision-making made by our borrowers. We've talked a lot about our asset management initiatives in terms of trying to hold on to loans. And so we do amend loans when their term is no longer reflective of where an asset is in its evolution. So if we made a loan on an asset that was not very significantly leased, then it becomes very [least]. If we want to hold on to that asset, we need to make an adjustment to the loan, and we do that on a proactive basis. And that definitely defers some of the prepayment activity. And that's part of the reason why you saw repayments in our portfolio a little bit lighter in the third quarter. And so hopefully, they'll stay light. I mean, we like that, but we'll see how it goes going forward.

And just the -- on that note, just one thing we noticed in the 10-Q. The Hawaii hotel loan in Maui, it looks like that loan was upsized and the term extended with some adjustment in spread. Is that one of the loans you're referring to in this quarter that could have otherwise prepaid?

Yes. That loan had dramatic improvement in performance from when it went into contract by our borrower to date, probably 18 months or 2 years later. 30% plus NOI improvement in the hotel. And so they're essentially looking for new -- a new 5-year loan on the hotel, and we were able to sort of head that off at the pass and maintain the loan we provided. So the equivalent of a new 5-year loan, but structured as an amendment of the existing loan, and we're able to -- because of our call protection, to get a rate on that loan that was not -- that was sort of at the midpoint, maybe, between where our loan rate was and where new loan would be on that asset. So we still were able to win on rate because of the ability -- because of our incumbency on the existing loan and provide the sponsor with a nice solution.

And were there any modification fees or unusual fees associated with that in the quarter?

I don't remember the exact fee dynamics, but we were very pleased with the overall economic package that we got. And I would just say -- and again, I would repeat sort of in general it was sort of somewhere in between where we were previously and where a new loan would get -- would be reflected.

Just switching to the initial commentary about the impact of early prepayment fees in the quarter at about $0.10. Is that $0.10 all-inclusive of any outsized, not unusual item because it's part of the business, but sort of above normal fees? For example, acceleration of amortization of origination fees, was there any -- was that $0.10 inclusive of accelerated amortization?

Jade, it's Doug. Yes, it was. So the $0.10 is the total number. It's hard to characterize them as recurring, nonrecurring or extraordinary or not. I think prepayment penalties as distinct from the amortization of deferred fees, origination fees tend to be a little bit more lumpy by definition. So you need to normalize for those at some level. But we always experience some degree of prepayment income because our loans as a general matter don't go to full term. So it's a gray area as to how much of that you consider recurring or nonrecurring. We've broken out the total amount. If you look back historically, you'll see that, obviously, in the last 2 quarters, we've had some real lumpy numbers. But if you look back historically, you'll see a few pennies every quarter coming from that on a fairly regular basis.

Was wondering if you could just discuss your approach to asset management more broadly. I'm sure you saw Bank of the Ozarks took 2 large impairments in the quarter, and I think it surprised investors because the loans had been on the books for so long. I think these were originated in '07, '08. So just wondering what you can say about your level of proactiveness with respect to discussions with borrowers. And also, if you could give an update on, for example, the Spanish NPL deal, how performance is going there.

Sure. I mean, I would just say in general, we're extremely proactive in our asset management. It's critical in -- both on an offensive and defensive way, given that we have few credit issues or no credit issues on our portfolio. Most of our asset management energy has been around rightsizing our loans and trying to keep them for longer duration. But we're extremely mindful of anything that might be going the wrong way in our loans. And early identification of issues is absolutely critical in terms of achieving success in asset management. And so I think -- if there are issues in our portfolio, we're going to identify them. We're not going to wait. So you will see them. And again, we have there our quarterly risk-rating process. We have historically had 2 loans that we rated for, they've both been repaid, they're both GE loans. So you've see us identify loans in the past and resolve them and that will continue to be our practice going forward. As it relates to the Spanish deal, it's really gone well so far. We're expecting a total of $950 million of sales in the underlying -- in the portfolio that underlies our loans. So for those who aren't familiar, it's a very large portfolio loan secured by mostly REO and NPLs in Spain, a lot of it's housing-related. And the underlying performance of the portfolio has been right on our underwriting. We're seeing a lot of activity in the portfolio. The sales performance is in line with our spot values, our underwriting. There's been good progress on the NPL book, which is about 1/3 of the collateral. We've seen 30% of those NPLs already resolved since closing. So we're very pleased with the progress so far, and we'll continue to report about it as we get more updates in the future.

Just lastly, in terms of the dividend to date, core earnings clearly running in excess of that. Assuming you maintain the dividend, would there be a need for a special dividend based on taxable income?

Jade, it's Doug. There wouldn't be a need for a special dividend in terms of our distribution requirement as a REIT. I think what we're very focused on there is the benefit of those retained earnings in terms of accretion to book value. But our distribution requirement as a REIT doesn't put any pressure on us relative to these -- the difference between core earnings and the dividend.

And the next question is coming from the line of Don Fandetti from Wells Fargo.

Question. If you look at valuations for financial on other companies in the equity markets, it seems like the market's suggesting an economic slowdown or recession. And I was just curious what you guys would do if you became convinced that we are moving more in that direction. Any portfolio moves? Leverage? And then secondly, around that, Blackstone, obviously, has a very good insight window into commercial real estate. Is the message a little more cautious internally over the last 3 to 6 months in terms of risk? Or has it been more steady?

I think we're sort of always -- in the lending business especially, we're always a little bit more cautious. We're making -- typically making loans that have a fully extended term of 5 years. The possibility of there being a recession during that 5-year term is -- seems quite possible. We've been looking at -- we presume that rates and cap rates will trend higher during our loan term or at least we have to underwrite the possibility that they might. And so -- and we've been -- we sort of have been looking at the world this way for a while now. So whether -- I don't think we see a near-term recession. The fundamentals in the economy feel strong to us, and we're not seeing anything on the ground that will lead us to believe this is a near-term issue. But our loans are -- and our company are definitely built to endure a slowdown, and we're conservatively capitalized with term match debt to make sure that we get through any kind of credit events that may occur, whether it be on any individual loan or across the portfolio as a result of recession. So it just has to be in your calculus all the time. But we're not seeing any real near-term indicators based upon our lending or ownership footprint.

Okay. And is there sort of the internal view as you all sit around the committees and talk about the market, is there sort of a growing sense of caution? Or is it maybe, to your point, you got to operate that anyway so it hasn't been incrementally different?

I think that -- again, I don't know if there's a growing sense of caution. I think that we feel it's a -- we've definitely -- it's been a little bit harder to make acquisitions and investments on the equity side in North America than it has been in prior years, and I think it's really with the market being a little bit more fully valued than it has in the past, maybe more so than the fear of any near-term economic event. But yes, we're certainly -- again, we're certainly really mindful. But I don't know that we're really looking at where we think value is and where value will go over time. Because again, we're not seeing anything that will lead us to believe that there is a near-term recession.

And our final question is coming from the line of George Bahamondes from Deutsche Bank.

Just wanted to ask a follow-up question on your last point, really around the U.S. market and it potentially being at or near peak levels. You referenced earlier in the call that your international exposure is now 19%. Do you have a sense for how large your international exposure can get as you see opportunities abroad? And can you provide any color around what spreads may look like for loans abroad versus what you might typically be seeing in the primary markets as you focus on the United States?

I think from a -- thanks, George. I think from an international standpoint, we're -- again, the flow internationally, it's harder to predict than it is in the U.S. It's definitely -- it has been more episodic. We're fortunate in that we have such a strong presence in so many of the international markets that when interesting deals come or when our sponsors go to these markets that we get an early call and have the ability to transact. Doug and the capital markets team have done a nice job again of exporting our cost to capital to these markets, creating multicurrency capability in our borrowings and gives us a big advantage in being able to transact. Spreads are a little wider in the deals that we're seeing in these markets. It's really, I think, a function of they're not being as much spread compression in the last 18 months there as we've seen here in the U.S. because there's just less competition. So spreads are probably 25 to 75 basis points wider on the opportunities that we're seeing outside the U.S. Hopefully, we'll see more of them. I don't know that our portfolio will grow a lot beyond sort of the 20% international exposure that we have today. If we see more opportunity, then perhaps we will. But it's -- we don't allocate, so we're just looking for the best opportunities that we -- to capitalize on whether it be in the U.S. or in the international markets that we cover.

Thank you very much. And let me hand back over to Weston Tucker.

Great. Thanks, everyone, for joining us this morning. If you have any questions, please follow up with me after the call.

Thank you very much. Ladies and gentlemen, that concludes your conference call for today. Thank you for joining. You may now disconnect.